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Change is coming to Social Security

The Lowell Sun

Updated:
02/15/2016 06:37:25 AM EST

Second of two parts

In our last article, I wrote about the Bipartisan Budget Act of 2015 that Congress signed into law in November. It closes certain loopholes in Social Security's rules to prevent couples, especially those in which both spouses had significant earnings, from obtaining larger benefits than intended.

These changes apply to the tactics known as "filing and suspending benefits," "deemed filing" and "filing a restricted application." Usually, these provisions are used together to maximize the benefits a couple can receive. Although many welcome this change as the first step of many needed to reform the system, eliminating these options can easily reduce benefits by tens of thousands of dollars. For those whose plans rely on these strategies but who have not yet implemented them, the following discussion should help them decide how to proceed.

Under the current Social Security system, a married person is eligible to collect the larger of their own benefit based on their work history, or a spousal benefit based on a percentage of what their spouse is entitled to. Furthermore, underlying the complex rules of Social Security is the simple concept that the longer a retiree is willing to wait to start collecting, the bigger his or her monthly check will be for the rest of their lives.

These two principles, when combined with the claiming tactics above, allow both spouses to accrue "delay credits" of about 8 percent per year for the period between their respective full retirement ages until age 70.

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At the same time, one of the two can collect spousal benefits based on the other's work history.

For example, one spouse (assume the husband) upon reaching FRA, can file an application to receive his own benefit based on his work history, and then immediately suspend receiving them ("file and suspend"), allowing his benefits to grow each year until age 70. This opens the door for the second spouse (the wife) to begin receiving spousal benefits based on the husband's work history. As long as she waits until her own FRA, she can, under the existing "deeming/deemed filing" rule, file a "restricted application" that limits her claim to specifically a spousal benefit. This allows her benefit to grow until the age of 70. The key to this approach is that she has to wait until FRA to begin collecting the spousal benefit. This strategy is known as "collect now and collect more later".

When the new rules take effect, "file and suspend" and "filing a restricted application" will no longer be allowed and "deeming" will be applied regardless if a spouse starts benefits before or after FRA. The net effect is that an individual can either choose to collect or not collect. The only way to allow their benefit to grow is to refrain from collecting until after FRA. Gone is the option for partners to collect a spousal benefit while allowing their own benefit to grow. Their own benefit can grow until age 70 only if they delay taking any benefits at all. In other words, there will be no option to first collect a spousal benefit and switch later to their own.

The changes go into effect after April 30, so, for now, all of the old rules remain in effect. After that date, the new, less favorable rules will apply. Therefore, the next five months mark a crucial transition period for those who fall within the age guidelines and are interested in determining if one of these claiming strategies might make sense for them.

There is a key timeline for dual-income married couples to be aware of. Those who are divorced, currently single, or have dependent/disabled children, will need to do some research to see how the new rules apply to them.

First, those who are already receiving benefits are not impacted at all. Therefore, if one spouse has filed and suspended (allowing their own benefit to grow) and provided their spouse access to spousal benefits, there won't be any adverse effect from the new law.

Second, anyone who reaches FRA and requests the file and suspend option by April 2016 will be able to take advantage of the delay credits and also trigger spousal benefits for their partner under the existing rules. After April 2016, anyone who reaches FRA and/or who wants to file and suspend will no longer be able to activate benefits for their spouse. A spouse will not be able to collect spousal benefits until the primary beneficiary actually begins receiving benefits.

Third, anyone who is 62 (born in 1953 or earlier) or older by the end of 2015, and has an earned income record of their own, will retain the right to file a restricted application in order to collect just spousal benefits starting at their FRA, while their own benefit continues to grow. This presumes their spouse has already claimed retirement benefits or has requested to file and suspend benefits by the April 2016 deadline.

Fourth, those who are younger than 62 (born in 1954 or later) are out of luck. They will be subject to the new, more stringent "deeming" rule, and as such, will be unable to claim a spousal benefit first, and then switch to their own benefit later. Instead, if they decide to start collecting, they will simply get the higher of the spousal or their own benefit.

There's no question that the new law substantially changes the landscape for implementing creative Social Security filing strategies by reducing the options available. However, it doesn't eliminate the need for applying sensible analysis and reasonable assumptions to optimize the timing of benefits, especially for couples. If done correctly, the right approach can yield significant additional income over the combined lifespan of the couple. Even more importantly, it can provide greater security to the surviving spouse after the loss of a partner, when their need may be greatest.

John Spoto is founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.

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